­Here’s the news of the week – and how we see it here at Mcalvany Wealth Management:

Do as the Central Banks Do, Not as They Say

The market action we are now witnessing reminds me of the first few months of year 2000. Back then it was clear, for those paying attention to the details, that tech industry and economic fundamentals had been deteriorating since the previous year’s 4th quarter. Yet tech stocks tacked on an additional 30% to the upside (into March 24th of 2000), just ahead of what was to be one of the most vicious declines ever seen in the Nasdaq’s history – losing more than 60% of value by the start of 2002. Today, it appears that not much has changed. Fast money (Fed QE) is pouring in, and it’s primarily being used to push stocks rather than deal with economic troubles.

The present bullish attitude has been around since last November, when stocks were at interim lows. Yet the 4th quarter of last year didn’t produce the kind of results the bulls were looking for. Most countries in the northern hemisphere posted negative GDP growth. This included the U.S., Germany, France, Japan, Portugal, Ireland, Italy, Hungary, and others. China posted positive results that again boggled the mind, but its numbers were not as good as in years gone by.

2-15-13Of course that was last year and this is this year, right? The market must be forecasting better results in the months ahead. Again, however, this may not be so. U.S. retail sales rose only 0.1% in January, and when you take into consideration that prices may have risen by 0.6% in the same month (judging by import price data), those figures were likely negative in real terms. Walmart extended the bleak outlook when it announced Friday that its start to February 2013 sales was the worst it has seen in over seven years. More of the same is apparent in Europe. U.K. retail sales fell 0.6% in January (and 0.6% YoY), which marked its fourth consecutive decline. It’s worth noting that the U.K. has implemented the same Keynesian policies as the U.S. has, but has achieved only higher deficits and lower economic activity.

That brings us to the metals. Though the market action for the group has flashed nothing but red since interim highs reached last October, that action is running counter to its underlying fundamentals in the same way stocks are vis-à-vis theirs. Last year alone, central banks accumulated a record amount of gold totaling some 534.6 metric tonnes, 17% more than in 2011 – this as the G20 tells us with straight face that they are in favor of price stability across all major currencies. As we have mentioned here ad nauseam, in response to the aforementioned economic uncertainty, the Fed is actively and perhaps progressively expanding its balance sheet – which now sits at a record $3.117 trillion. This should eventually prove supportive for the metals.

Technically speaking, after breaching the 200-day moving average, the metals have been stuck in what’s referred to as a “wash-out” of weak-handed players – or, more tactfully put, a psychological battle for solid ground. There is no telling exactly where the metals will find their footing, but, by observing the fact that they have retraced to levels below that of last August, the downside may be very limited from here on. Last August, coincidentally, was when the metals “broke-out” to the upside after Bernanke pledged $45 billion a month in mortgage-backed securities purchases. That break-out level, in and around $1620, has been validated even more substantially by the Fed’s doubling of its efforts since then to $85 billion. For now, however, in reaction to the damage, the metals may be range-bound technically until it’s clear to the bulls (in stock land) that the economy needs more help. At that time, the Fed may up its QE commitments once again – subsequently allaying the irrational fears now extant within the metals markets.

Best regards,

David Burgess
VP Investment Management